Abstract
The main channel of information dissemination for initial public offerings (IPO) in the pre-listing stage is the prospectus. Auditor fee and director emoluments are two types of information that investors know about in advance through the prospectus. Industry and media publicity are also in the focus of investors in the pre IPO stage. This study inquires whether such information can be used to form successful trading strategies in the long run. IPO stock portfolios have been constructed based on the above four types of information and their returns have been tested using four popular asset pricing models to answer the above question. The findings confirm that long only strategies are successful with regard to all four types of information while long and short strategies are proved to be a failure. The findings also reveal that portfolios consisting of non-finance stocks, stocks with high media coverage, high audit fees and high director fees tend to provide the highest returns compared to other IPO stock portfolios. Hence, this study provides useful insights to investors, regulators and other professionals in the Sri Lankan capital market.
Highlights
The main channel of information dissemination for initial public offerings (IPO)in the pre listing stage is the prospectus which typically includes valuable information such as details of the issue, overview on business operations and industry, management discussion and analysis, and corporate structure and past financial statements together with the auditor’s report
Six portfolios were created as low media search results (LMSR) and high media search results (HMSR) based on media coverage three months prior to the issue, low director fees (LDF) and high director fees (HDF) based on director fees paid by the company immediately prior to IPO, and low auditor fees (LAF) and high auditor fees (HAF) based on auditor fees paid by the company immediately prior to IPO
This study examined the effectiveness of trading strategies formed on pre IPO information such as industry to which the IPO belongs to, pre IPO media coverage, pre IPO director fees and pre IPO audit fees
Summary
The main channel of information dissemination for initial public offerings (IPO)in the pre listing stage is the prospectus which typically includes valuable information such as details of the issue, overview on business operations and industry, management discussion and analysis, and corporate structure and past financial statements together with the auditor’s report. Investors have to use this pre IPO information wisely in order to avoid IPO long run underperformance documented by Ritter (1991) in United States of America, which was subsequently reported in many parts of the world including Levis (1993), Kooli and Suret (2004), and Sahoo and Rajib (2010). Peter (2007) conducted a study on the long run performance of Sri Lankan IPOs. The general trend of IPOs identified by many scholars including Ritter (1991) is that the long run excess returns diminish by the end of three years. This study intends to examine the effectiveness of long only as well as long and short trading strategies based on pre IPO information as a remedy to the long run underperformance of IPO stocks
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